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CBS (CBS), You are Turning Simon & Schuster into a Dinosaur
Fri, December 11, 2009 12:05:11 PMFrom: InvestorGuide Stock of the Day

Stock of the Day Newsletter — 12/11/2009
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Stock of the Day


CBS (CBS)

CBS, You are Turning Simon & Schuster into a Dinosaur

CBS shed its cable businesses when Viacom was spun off into a new company by Sumner Redstone in 2006. Post the Viacom (VIA: Charts, News, Offers) split, CBS started trading at $27.23 and since then, has lost half of its value, its currently trading at $13.83. A big reason for this is its inability to understand and adapt to the digital marketplace. Let's focus on it publishing arm, Simon and Schuster (S&S), as a prime example of the lack of imagination inside CBS' think-tank. S&S announced earlier this week that it is going to delay the release of e-books for about 4-6 weeks after the traditional hardcover goes on sale. Apparently, somebody at S&S has been watching the Jurassic Park movies again because they seemingly have the desire to become the next dinosaur.


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Here is the quick background. Traditionally, the publishing industry (i.e. Random House, Simon and Schuster, HarperCollins et al) have released the hardcover version (average selling price - $27) of hot titles and then followed it up with a cheaper paperback version months later as a way to capture the more price-sensitive consumer. Recently, digital books (i.e. e-books) have become popular allowing consumers to read them on their computers, mobile phones and dedicated e-book readers such as the Kindle and Nook. The market for e-books is still relatively small, amounting to only $200 million in sales but is growing rapidly as more and more people come to appreciate the convenience of ordering a book from home and having it instantly delivered to them in a digital format. Amazon (AMZN: Charts, News, Offers) is the biggest retailer of e-books and though it still pays the publisher the traditional fee of 50% off the hardcover list price (~$13) for each e-book sold, it turns around and sells most of the e-books to consumers for only $9.99. Amazon is okay with taking a loss on each e-book for now as these sales essentially act as a loss-leader to help the retailer build up sales of its Kindle e-reader. Publishers fear that eventually, Amazon is going to stop taking these losses and demand to pay a lower fee for each book. Plus the publishers fear that the proliferation of e-books is going to condition consumers to start thinking that books are worth only $10 and not a penny more.


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$10 is not a price point that publishers can survive at. And justifiably so. Consumers tend to believe that just because the content is in an electronic format and not a paper one, it should be discounted heavily, when in reality, printing and packaging only accounts for about 12% of a book's cost. The rest of the cost drivers - i.e. royalty to the author, editor's salaries, marketing costs etc., are the same for e-books as they are for hardcovers. So the proliferation of e-books priced at $10 is a big problem for the publishing industry.


So what is their solution? Ignore the problem, delay it and hope that it magically goes away. That is essentially the approach S&S is taking along with some other major publishers by announcing earlier week that they will delay the release of e-books to 4-6 weeks after the hardcover is out. HarperCollins earlier this year delayed the e-book release of Sarah Palin's 'Going Rogue' , which the publishing industry says had a major positive impact on the hardcover sales and so now, that is the model of success. Simon & Schuster is going to put 35 anticipated titles on this delayed e-book release schedule next year including Karl Rove's book. Here is what Carolyn Reidy, CEO of S&S, had to say "The right place for the e-book is after the hardcover but before the paperback. We believe some people will be disappointed. But with new [electronic] readers coming and sales booming, we need to do this now, before the installed base of e-book reading devices gets to a size where doing it would be impossible."


Read that above statement again and it will become apparent just how out of touch the publishing industry is. Here you have Schuster's CEO claiming to know where the correct slot for e-books is even though the consumer disagrees, as evidenced by the popularity of e-readers and e-books. The next sentence is even more ridiculous because she essentially acknowledges just how popular e-books have become but instead of being thankful for the fact that there is great demand for her product (albeit not in the format that she was trained to like) and finding a way to work within those parameters, she is actually naive and arrogant enough to think that by delaying the sales of e-books, she is going to be able to alter long-term consumer behavior and preferences. She needs to call some people in the music industry to understand what they went through and what her company is about to go through. You have to wonder how Simon and Schuster is going to make it through the next decade with such a backward looking leader. This also sheds a very poor light on the corporate culture at CBS and how innovation is viewed.

Here is an alternate approach and advice for S&S and the rest of the publishing industry. Quit whining, change with the times and deal with the issue at hand. The publishing industry definitely has a legitimate case when they argue that the cost structures for e-books are not that different from print books. But then whose fault is it that e-books are selling only for $9.99 and not for something between $9.99 and the hard cover price of $27 (e.g. ~18, a price that is palatable to consumers and publishers)? Publishers are to blame. They ceded all the pricing power to Amazon. For the last 4-5 years, they should have been preparing for the transition to the digital marketplace but they were more focused on protecting their traditional fiefdoms and in the meantime, Amazon has built up a dominant presence in the area on the hardware (Kindle) and software side (distribution of e-books). Now the online retailer has so much power that it can dictate to these publishing houses the price of e-books and the publishers have to essentially put up or shut up.

They key for the publishing industry is now to wrest control back from Amazon. Don't let Amazon become the Apple of books. It's close to happening but the publishers still have time if they focus on the correct things. They should embrace the e-books revolution and realize that it will draw more people to books and increase overall readership of their content. The publishers should get some control of the distribution channels by perhaps launching their own e-books stores and investing heavily in R&D so that the consumers have a better experience in their digital environment than with Amazon. This will also allow them to have greater leverage when it comes to negotiating with Amazon and would force the retailer to increase the price of e-books. Publishers would be also be well-served by using this opportunity to squeeze the inefficiencies out of their cost structure.

So CBS and Leslie Moonves, if you still want to be player in the publishing industry in a decade, talk some sense into the executives running Simon and Schuster.


Adding some more color to this issue

Why e-books aren't cheaper - Here is why they don't sell for south of $9.99.

Delay eBooks by four months? What are they thinking? - Echoing our thoughts

Is dynamic pricing really magical?

What else is going on?

Love The One You're With: Apple Wanted AdMob, Google Wanted Lala - Apple and Google are increasingly preying on the same targets

Goldman Sachs to pay bonuses in stock - That's a bitter pill to swallow for the head guys at Goldman, now can we leave them alone?



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